Personal Tales of Innovation: Determining the Value of a Patent, Part Two.
In my last blog post, I talked about my seven criteria for valuating a patent. Some of you might be thinking, “If there are only seven things to consider, why is it so hard to get a concrete estimate on a patent’s worth?” The reason it’s not that simple is that there’s a lot that has to go into those answers, and depending on whom you ask, you may get really different answers. It’s actually a lot like buying stocks. Is the person you’re seeking advice from a short-term investor? Or are they a “buy and hold” guy? To whom, how, and when you ask the question can all affect the answer.
Three Disciplines, Even More Opinions
The patent licensing world stands on three overarching and distinct disciplines, all of which must be accounted for in the final valuation. In no particular order, they are legal, technical, and business. As you can imagine, each of these three disciplines approach concerns and questions from a different vantage point, and thus, place value on different aspects of any given patent. While a particular circumstance may place more importance on one of the three disciplines, having all three perspectives is necessary—ignoring one could lead to a crucial and costly blind spot in your analysis. Adding a layer on top of that, there can be differing opinions within a single discipline, which culminate in a completely different analysis and conclusion. Finally, like most things in the business world, timing can also be a crucial factor. Factoring in all these layers, seven “simple” criteria is actually quite complex, tripling (if you’re lucky) the amount of work and consideration necessary to arrive at a confident assessment. Let’s break it down.
To see how intra-discipline conflict can come into play, here’s a possible scenario for the first criterion, Scope of Problem and Efficacy of Solution. Let’s pretend I’m a portfolio manager, and I have a patent on a new, flexible glass that I need to assess. It is lighter, stronger, and more flexible than normal glass, which means it can be made thinner and curved—providing a more durable, lighter-weight solution than standard glass. But within the technical area, there can be differing opinions about this technology that are all correct but suggest contradictory action. For example, if I sent it to my “glass guy”, he might say, “Nice technology. It’s interesting for a small segment of the market, but also more expensive to produce than regular glass, so it won’t affect the bulk of the market. There may be niche products that could benefit.” Send it to my displays guy, and he might say, “Light-weight is nice, but not a big driver in the majority of the displays market. The portable display market would more likely adopt—especially if curved screens take off. A thinner substrate should help limit the optical distortion from curving the screen.” Finally, I send it to my handset guy, and he goes nuts, exclaiming, “Everyone will want this!” So, although each assessment is totally different, they are each valid, based on the expert’s experience and what they value.
So to fully understand each assessment, I need to first understand the “assessor”— what he knows and even the criteria he’s using to assess the situation. I can know everything about the patented technology, but until I place it in context with an actual product, I don’t really know what I have as far as dollar value goes. This can also make it hard to reuse these ratings on another project. Imagine that each expert is correct in their own right, and I am trying to license all three industries above. I might not even meet with anyone in the glass industry. Alternatively it could be the only patent I show to the handset manufacturers to license their whole business. Of course, this is assuming I send the technology to all three experts. Because there’s a fee involved for every expert you approach, there’s often a tendency to rely on only one technical opinion. What happens to my handset licensing program if I only ask my glass expert and rely on his rating? Do I even find this asset? Everyone has their own perspective, experience, and bias they bring to the assessment. So, “What’s the value of the patent?” The answer you get depends a lot on whom you ask, and how you ask them.
This conflict in expertise and value holds true between disciplines as well. Let’s consider an interaction between a technical and legal expert. A technical person reading a particular patent might not understand how the legal reading of the file history impacts his interpretation of the patent. Since everything the applicant submits to the patent office can have a legal impact on what the patent covers, you can’t ignore this piece—it may even be more important than the technical assessment. For example, if the applicant tells the PTO that “passenger vehicle” is not intended to include “trucks,” then “trucks” are not covered by claims about “passenger vehicles,” and therefore the document can’t be asserted against “trucks.” As we touched on above, context comes into play. If I’m looking to apply against Ford, where the F150 is their most popular vehicle, this asset might fall in interest. This time, the legal aspects radically affect the technical read, and therefore, the value.
In my work history as a technical resource, I spent hours reading patents and finding evidence to support my read, only to have the lawyer tell me, “You can’t read it that way.” I’ve also spent a lot of time thinking about what is meant by the words above, between, and adjacent, as they can become central to understanding whether or not a structure infringes a claim. For instance, I have electronic elements 1 and 2 electrically connected in a circuit with a filter between. It may not be possible to understand if the filter must be physically (spatially) or electrically (schematically) between the elements or both. The right interpretation can really affect the infringement argument and the value of the asset. I’ll spare you an example involving the business perspective, but you can imagine all the different points of views there.
The last major piece of the puzzle is timing. There are three really important aspects of timing. One is that technology is highly integrated and a moving target. I call this “market timing.” By that I mean that a change in one part of the landscape can impact previously unaffected areas. Take for example, GPS technology and mapping the world. These two technologies, which started out as military applications, can now be found in just about every type of technology. The original unit was a full console on a plane, and up until just twenty years ago, a GPS was portable, but still its own special purpose unit. Today, it’s a tiny circuit in our cell phones. Think about all the commerce over location-based technology. Its underpinning IP is not even that old. And what about those patents from ten years ago that located a hiker on the right topographical elevation line? They could also be used to put someone on the right floor of a multistory building. Knowing if someone is on the first or second floor of a mall allows you to know what store they are standing in front of, and that is highly valuable to retailers. A patent that was not worth much at inception can radically increase (or decrease) in value as technologies and our environment evolves over time.
The second timing aspect is what I think of as a spot price. These are short-term circumstances where patents can be extremely valuable to a company. For example, ASML is close to having a monopoly position on a very complex lithography machine, called a stepper. While they competed with Canon and Nikon in the past, the two giants have since mostly exited the space, though their patents in this technical area have not yet expired. And though ASML used to have cross-licensing arrangements with Canon and Nikon, all cross-licensing opportunities passed once Canon and Nikon left the business. These days, the majority of Canon and Nikon’s business is focused on DSLR cameras. And even though ASML has no commercial camera business, I wouldn’t be surprised if, when it’s time for licensing talks, they show a strong interest in some DSLR technology to protect their $55 billion-dollar company. Remember that the only right a patent provides is one to prohibit. So if the other companies are no longer making steppers, ASML’s own portfolio might not offer much in the way of protection. While ASML may have no interest in ever producing a DSLR camera, on licensing day, they may be willing to pay a premium for those patents— way more than a camera company might—to help license Canon or Nikon’s core business and offset their costs.
The third timing aspect is shelf life. This is a more strategic view of market timing. When looking at relative scoring of two different patents, be aware that the relationship between the technologies when the assessment was done could be very different from what it is now. For the glass example we used earlier, that technology probably changed value when Samsung came out with curved displays, particularly for handheld devices, where they are displaying information on the edge of the display. The thinner, stronger, more durable material we described would probably help with manufacturing costs, reducing the difficulty of (and failures from) building a display with a curved edge. If the review had been done six months prior, that market segment may not have even existed, so that value would be unaccounted for in the estimate. Also, as the process scales, the costs might come down directly, making it more desirable across the broader glass industry.
In conclusion, while it might only involve seven criteria, determining the value must also consider the viewpoints of commercial, legal, and technical factors that aren’t present in the patent document itself. Timing is another important factor, with market and competitive forces changing the relative desirability (and therefore, price) of different assets. The differing points of view can often lead to conflicting indications of value. By now, you can hopefully see why getting the most unbiased and reliable patent valuation isn’t as easy as it seems. But if you create a simple, concrete list of criteria, consider each discipline’s recommendations and opinions, and get the evaluations done within a set timeframe, it’s not impossible either.